Has the double dip started?

House prices fell by a record 3.6% in September, according to Halifax – the biggest monthly drop since it started monitoring them in 1983.

Despite seeing signs of recovery in the property market earlier in the year, many analysts have been warning that we could be heading for a double dip. So is this the beginning of it?

Too early to say

While the housing market is showing signs of weakness, prices are still 2.6% higher than they were this time last year according to Halifax. The average house is worth £162,096.

Over the last quarter, prices have slipped back just 0.9% and Martin Ellis, housing economist at Halifax, believes it is too early to call the start of a double dip.

“It is far too early to conclude that September’s monthly 3.6% fall is the beginning of a sustained period of declining house prices,” he said.

But the outlook isn’t great

There are so many different housing market indices now that it is important not to take a single month’s data from one report in isolation. However, equally it is hard to see why prices would rise significantly in the near future.

In the 12 months from September 2008-2009, house prices fell by an average of 7.4% nationally – falls were greater in some areas, while in others prices held up much better. The property market was hit by a downturn in consumer confidence as a result of the credit crunch and recession, coupled with a severe shortage of mortgages. As a result, demand from buyers slumped.

Then at the back end of last year and early this year, as the country emerged from recession, confidence picked up slightly and potential buyers returned to the market. Demand outstripped supply which helped push prices up.

However, in turn many of those who had been thinking of moving but held off because of the market weakness put their properties up for sale, which helped redress the imbalance between supply and demand.

If all other conditions were normal, we’d probably have a healthy housing market at the moment. But with many people worried about their job security; households finances under strain from government cuts; fears that the economy may slip back into recession; and an ongoing shortage of mortgages, things are far from normal.

Latest lending figures from the Bank of England revealed that mortgage approvals dropped to a six month low in August.

Against this backdrop it seems likely that the current weakness in the housing market will persist. That doesn’t necessarily mean we’re heading for a full scale crash but there are risks that could mean the downturn proves to be prolonged.

We need more mortgage lending

The fact interest rates are low is undoubtedly good for borrowers and the Bank of England’s Monetary Policy Committee voted to keep base rate on hold at 0.5% again this month.

As a result there are some great mortgage rates on offer: HSBC has a lifetime tracker at 2.19% and if you’d prefer the security of a fixed rate, you can lock into a rate of 3.89% for five years with Yorkshire Building Society.

The only problem is, many people can’t get these products. Both of the aforementioned mortgages are only available to those with deposits of 40% or more. This isn’t much use to first-time buyers (who, remember, are the life blood of the property market – if they can’t get into it, the rest of it pretty much grinds to a halt). Nor is it much use to those who have seen the value of their homes fall and their equity stake shrink.

There are, of course, mortgages for those with smaller deposits and on the plus side the number of products available has increased in recent months, but lenders remain ultra cautious about who they’ll offer a mortgage to and many borrowers are still struggling to get a home loan.

Pre-credit crunch there were more than 30,000 mortgage products on the market. Currently there are just over 3,000 (although this is about 30% higher than a year ago) and only a handful of lenders are actively competing to attract new mortgage business.

It is in no one's interests for banks and building societies to lend irresponsibly but if the supply of mortgages remains so restricted it will increase the risk of a prolonged downturn in the housing market.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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